Although the tax on company cars has risen steadily over the years, they remain incredibly popular in the UK. According to Car magazine, roughly one in two new cars registered each year is part of a fleet purchase.
A company car is seen as a perk, or a benefit-in-kind, by HMRC and taxed accordingly as if it were extra income. Consequently, many people decide to use their own car and claim a mileage allowance instead.
This article explains the tax implications of using vehicles at work, whether they are petrol or diesel cars or electric/hybrid.
Personally owned cars
If you use your own car for work purposes, you can claim a tax free mileage allowance. This cannot exceed 45p per business mile up to 10,000 miles per tax year and 25p per mile thereafter.
Claiming mileage is relatively straightforward through an expenses claim.
Tax on company cars
When it comes to company cars, the tax payable (classed as a benefit in kind or BIK) is more complicated. The amount of the BIK applying to a company car depends on the CO2 emissions it releases. The more emissions and the higher the car’s value when new, the higher the taxable BIK and hence the tax liability.
Here is a worked example of the tax payable on a company car to illustrate how the calculation is achieved:
Car’s initial list price: £20,000
CO2 emissions: 120g/km
Car tax band: 28% – based on level of emissions and cost
Taxable benefit in kind: 28% x 20,000 = £5,600
BIK tax payable by a basic rate taxpayer = £1,120
BIK tax payable by a 40% rate taxpayer = 2,240
From 2020, drivers with diesel company cars will also have to pay a 4% tax surcharge unless their car meets new RDE2 standards.
Electric Vehicles
With effect from 1 September 2018, the official mileage rate for electric company cars is 4 pence per mile. HMRC calls this rate the Advisory Electricity Rate (AER). For example, if an employee travels 8,000 business miles in their fully electric company car, they can receive £320 in mileage for the tax year free of tax or NIC
Some companies have facilities for tax-free charging of electric car batteries at work and this facility can be provided as well as the reimbursement of business mileage using an AFR. It applies to cars that are privately owned and to company cars, provided that the charging facility is located “at or near the workplace” and is available for all employees to use.
Alternatively, HMRC allows employers to use their own mileage rate if certain conditions are met. These are that the business travel cost is more than the recommended rate and the electric cars used are more efficient. However, if an employer pays a higher rate than the recommended HMRC mileage rates for electric cars (AER), they must be able to prove that the electricity cost per mile is higher. Otherwise, HMRC will treat any excess as taxable and the employer will be required to pay Class 1 National Insurance.
There are currently no specific rates for hybrid cars. HMRC recommends plug-in hybrid and hybrid car drivers use AFRs according to the amount of fuel the engine uses. You should also keep in mind that the HMRC rates don’t consider whether a driver mainly uses the electric motor or petrol engine.
When using a privately owned electric vehicle at work, it is possible to claim for mileage too. These are known as AMAP rates and just like diesel or petrol cars, the amount that can be claimed is 45p per mile tax-free for the first 10,000 business miles. The rate for subsequent miles is 25p per mile.
So if an employee travels 8,000 miles for business purposes in their own fully electric car they could claim 8,000 x 45p = £3,600. The AMAP rate is higher than the AFR rate because it covers fuel costs as well as running costs such as MOT and repairs.
Overall, this means that although buying an electric car can be expensive in the first place, in the long-term they can be a cheaper alternative to petrol or diesel cars. They will cost less to run, are more environmentally friendly and they are significantly more tax efficient.